Monroe Capital’s Koenig dismisses the distinction between ‘good’ and ‘bad’ PIK

Monroe Capital chief executive and chairman Ted Koenig used a session at the CAIS Alternative Investment Summit in Los Angeles this week to criticize practices that lenders use to mask stress in private credit portfolios. Speaking to an audience of independent financial advisers, banks and alternative asset managers, Koenig characterized both extending debt maturities to avoid tripping covenants and switching from cash interest to payment-in-kind toggles as forms of "silent default."

Koenig also rejected the common practice of treating PIK differently depending on timing. Lenders typically view PIK more favorably when it was negotiated at the outset of a loan than when it is added later, since the latter is generally associated with financial strain and reduced ability to service debt. Koenig dismissed that framing, arguing that borrowers generally elect PIK only because they cannot pay current interest. "Would you rather get paid 8% or 10% current, or would you rather get paid 11% or 12% in five years? I want the current payment all day long," he said. He added that investors "need to ask questions" when reviewing portfolios containing PIK.

Monroe Capital had $23.8 billion in assets under management as of July 1, invested across direct lending, structured credit, venture debt and other private lending to the lower middle market. The article was updated to reflect more recent AUM data.

Koenig's remarks coincide with growing scrutiny from rating agencies. A Moody's Ratings report published Wednesday found that the private credit default rate climbed to 5.8% over the 12 months to June when PIK amendments and maturity extensions among distressed borrowers were treated as default-equivalent events, compared with 4% based solely on reported defaults. Moody's counted these moves as default-equivalent because they share characteristics with distressed exchanges. The analysis tracked 607 private credit issuers held in middle-market CLOs, of which 106 (17%) pay some interest in kind. PIK issuers showed weaker financials, including deteriorated liquidity, negative free cash flow, high leverage and interest coverage around 1x EBITDA, regardless of when the PIK feature was introduced.

The debate arrives as borrowers face higher borrowing costs, sticky inflation, supply chain disruptions and AI-related disruption. The Federal Reserve raised rates by a quarter percentage point last month and projects one more quarter-point hike before year-end.